Mercer Global Investments Canada Limited
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted to registered adviser from certain provisions of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations amended or introduced under the Client Relationship Model Phase 2, specifically sections 14.2, 14.2.1, 14.14.1, 14.14.2, 14.17 and 14.18 I -- in respect of certain institutional clients that do not meet the definition of "permitted client" and are not individuals.
Applicable Legislative Provisions
Multilateral Instrument 11-102 Passport System, s. 4.7.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 14.2, 14.2.1, 14.14.1, 14.14.2, 14.17, 14.18, 15.1.
August 14, 2020
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF MERCER GLOBAL INVESTMENTS CANADA LIMITED (the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application (the Application) from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) that pursuant to section 15.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) with regard to the Overflow Accounts and the Institutional Investor Accounts described below, the Filer is exempt from the reporting requirements in sections 14.2, 14.2.1, 14.14.1, 14.14.2, 14.17 and 14.18 of NI 31-103 (the CRM2 Reporting) (the Requested Relief).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for the Application;
(b) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (the Passport Jurisdictions and, together with Ontario, the Jurisdictions); and
(c) the decision of the principal regulator automatically results in an equivalent decision in the Passport Jurisdictions.
Interpretation
Terms defined in MI 11-102, National Instrument 14-101 Definitions and NI 31-103 have the same meaning if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a corporation existing under the laws of Canada with its head office located in Toronto, Ontario.
2. The Filer is registered:
(a) under the securities legislation of all provinces and territories of Canada as a portfolio manager and an exempt market dealer;
(b) under the securities legislation of Ontario, Québec, Newfoundland and Labrador and Manitoba as an investment fund manager;
(c) under The Commodity Futures Act (Manitoba) as an adviser;
(d) under the Commodity Futures Act (Ontario) as a commodity trading manager; and
(e) under the Derivatives Act (Québec) as a derivatives portfolio manager.
3. The Filer is not in default of securities legislation in any jurisdiction of Canada.
4. One of the Filer's lines of business is called the "Outsourced Chief Investment Officer" (the OCIO), which offers discretionary investment management services to institutional permitted clients.
5. The Filer has another line of business called "Private Wealth", which provides wealth management services primarily to high net worth individuals. The Filer currently provides CRM2 Reporting to its clients within the "Private Wealth" line of business. The OCIO and "Private Wealth" lines of business are distinct business units that serve very distinct market segments with different products and services that are tailored to their respective clients' specific needs.
6. The Filer's clients utilizing the OCIO services are exclusively institutional permitted clients (the Existing Permitted Clients). The Existing Permitted Clients are sophisticated institutional investors. The Filer has worked collaboratively with the Existing Permitted Clients to develop tailored institutional reporting that provides a level of transparency to best suit their governance needs and reporting obligations to their beneficiaries, auditors, governance committees, etc. This institutional reporting includes tailored and detailed requirements with respect to format, frequency and content of account statements and performance reports, and, in some cases, include more disclosure than what is required under the CRM2 Reporting requirements.
CRM2 Reporting
7. Under NI 31-103, registered firms, such as the Filer, are required to provide CRM2 Reporting to non-permitted clients and all individual clients. The CRM2 Reporting applies to all categories of registered dealers and registered advisers, with some application to investment fund managers.
8. CRM2 Reporting includes performance reporting requirements and enhanced cost disclosure and client statement requirements.
9. CRM2 Reporting includes certain exemptions for permitted clients that are not individuals.
The Accounts
10. Certain of the Filer's Existing Permitted Clients may from time to time:
a. request that the Filer open new accounts for related entities that do not qualify as permitted clients only because they fall short of the financial tests in the definition of permitted client in section 1.1 of NI 31-103, but otherwise have the characteristics of an institutional investor (an Overflow Account); and/or
b. due to market or other conditions after an account is opened with the Filer, fall short of the financial tests in the definition of permitted client in section 1.1 of NI 31-103, but otherwise continue to have the characteristics of an institutional investor (an Institutional Investor Account and with an Overflow Account, an Account).
11. The Filer considers these clients to be "institutional" clients because they meet other criteria common to institutional clients. In particular, each client with an Institutional Investor Account will be a permitted client at account opening but may, over time, technically cease to be a permitted client due to market or other conditions causing the client to fall below the financial tests in the definition of permitted client in section 1.1 of NI 31-103.
12. Without the Requested Relief, the Filer must provide the Accounts with the CRM2 Reporting.
13. The Accounts in aggregate will not exceed 2% of the Filer's total assets under management.
14. The Existing Permitted Clients have worked with the Filer to provide institutional reporting tailored to meet specific client requirements.
15. In common with Existing Permitted Clients, the Accounts are expected to have detailed requirements with respect to the format, frequency or content of the account statements and performance reports they receive because of the reporting they have to provide for their stakeholders including beneficiaries, auditors, governance committees, etc.
16. In common with Existing Permitted Clients, the Accounts may also engage professional advisors, such as consultants, auditors or legal counsel, who may recommend specific reporting (form, frequency, tailored content etc.) which may, in some cases, differ from CRM2 Reporting.
17. In common with Existing Permitted Clients, the Accounts are expected to require reporting content that is highly detailed and transparent. The reporting will be robust and comprehensive and may, in some cases, include more disclosure than what is required by CRM2 Reporting.
18. The Institutional Investor Accounts will want to continue to receive the same tailored institutional reporting even if they no longer strictly meet the definition of permitted client. It is important for consistency of reporting to such a client, including the reporting that such a client must provide to its stakeholders, that they continue to receive the same reporting after failing to meet the definition of permitted client.
19. The Overflow Accounts are often overseen by the same governance bodies as the Existing Permitted Clients. It would be undesirable to provide the same governance body of the related Overflow Account with reporting that complies with CRM2 Reporting, but differs from the tailored institutional reporting already being received by the Existing Permitted Client.
20. The OCIO service operates in a business unit that is distinct from the Filer's line of business that provides CRM2 Reporting to clients. It would be costly and burdensome for the Filer to build the CRM2 Reporting capabilities to the OCIO business unit and economically infeasible for the very small number of Accounts contemplated under the Requested Relief. It would also be undesirable from the perspective of the Existing Permitted Client if its related Account was transferred to a different business unit and serviced outside of the OCIO business unit.
21. The Filer would incur significant costs and resource-strain to implement CRM2 Reporting for the Accounts.
22. Each Account will be informed by the Filer that it will not receive the CRM2 Reporting that it would have been entitled to but for the Requested Relief and will receive an explanation of what is provided with CRM2 Reporting as compared to the current reporting it receives.
Decision
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Requested Relief is granted provided that:
(a) the Requested Relief applies to the Accounts serviced by the Filer under the OCIO service (or as the OCIO service evolves over time, provided that such future service substantially meets the representations set out herein);
(b) the Accounts in aggregate do not exceed 2% of the Filer's total assets under management at the end of each fiscal year of the Filer;
(c) the Accounts receive comprehensive account reporting from the Filer on an ongoing basis which is consistent with the reporting provided by the Filer to the Existing Permitted Clients;
(d) each Account is informed that it will not receive the CRM2 Reporting that it would have been entitled to but for the Requested Relief;
(e) each Account receives an explanation of what is provided with CRM2 Reporting as compared to the reporting it will receive; and
(f) if the Filer opens any new accounts for (i) clients that are not permitted clients at the time of account opening, other than the Accounts, or (ii) permitted clients that are individuals, it will provide CRM2 Reporting for those new accounts, unless it obtains other exemptive relief in respect of them.
"Felicia Tedesco"
Deputy Director
Compliance and Registrant Regulation Branch
Ontario Securities Commission